DEFINITION of Everest Option
An Everest option is a type of exotic equity option belonging to a class known as mountain range options. The value of an Everest option is based on a basket of underlying securities, as opposed to the typical listed option which has just one underlying asset.
Everest options are in effect for very long time periods – up to 10 years or more – and the payoff of the option is based on the aggregate performance of the worst-performing stock over the full time period.
BREAKING DOWN Everest Option
Everest options are created by - and for - large institutional investors, like hedge funds and investment banks. These very intricate options may contain between 15 and 25 stocks, which can make them difficult to fairly value.
An investor could be devastated by one bad stock among a group of otherwise great performers over the life of an Everest option. If 14 out of 15 stocks were to quadruple in value but the remaining stock dropped 10% over the full period, the option would only recognize the performance of the latter in its payout since the payment is based upon the worst perform stock in the group.